Micron Technology (MU +0.21%), one of the world's leading producers of DRAM and NAND memory chips, recently posted strong first-quarter numbers that easily beat Wall Street's expectations.
Its revenue rose 12% year over year to $5.77 billion, beating estimates by $110 million and marking its third consecutive quarter of growth. Its adjusted net income rose 64% to $897 million, or $0.78 per share, which cleared expectations by nine cents.
Those numbers indicate Micron's core DRAM and NAND businesses, which struggled with a supply glut and declining prices throughout 2019 and 2020, have finally stabilized. But is its stock still worth buying after advancing about 40% over the past 12 months?
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Has Micron's business recovered?
Micron's revenue fell year over year for six straight quarters before recovering in the third quarter of 2020.
|
Growth (YOY) |
Q1 2020 |
Q2 2020 |
Q3 2020 |
Q4 2020 |
Q1 2021 |
|---|---|---|---|---|---|
|
Revenue |
(35%) |
(18%) |
14% |
24% |
12% |
|
Non-GAAP EPS |
(84%) |
(74%) |
(22%) |
93% |
63% |
YOY = Year over year. Source: Micron quarterly reports.
It attributed that recovery to accelerating orders for 5G devices and network upgrades, content share gains in the recovering auto market, high demand from data centers, and pandemic-induced purchases of new PCs. Those tailwinds reduced the available supply of DRAM and NAND chips and stabilized market prices.
Micron's revenue from the compute and networking, mobile, and embedded markets all rose year over year during the first quarter. The only soft spot was the storage market, where revenue fell 6% year over year.
Its DRAM and NAND businesses are rebounding
Micron generated 70% of its revenue from DRAM chips during the first quarter. Its DRAM revenue dipped 7% sequentially due to lower bit shipments and average selling prices but rose 17% year over year.
Micron claimed its DRAM business had passed "the bottom of the industry cycle" and would see "improving trends" throughout 2021. It expects the aforementioned tailwinds, along with robust demand for its new GDDR6 memory chips and the introduction of its new 1-alpha node for next-gen chips, to drive that growth.
Micron generated another 27% of its revenue from NAND chips during the quarter. Its NAND revenue rose 3% sequentially, with higher bit shipments offsetting lower average selling prices, and grew 11% year over year.
The NAND market recovered before the DRAM market last year, and Micron expects the business to benefit from shipments of more advanced NAND chips (including its more power-efficient 176-layer design) in 2021.
Micron expects rising demand to outpace its supply growth in DRAM and NAND chips throughout the rest of the year, which means its prices should stabilize and rise. At the same time, Micron plans to cut costs at the DRAM and NAND businesses to boost its operating margins -- which already expanded year over year from 12% to 17% in the first quarter.
Accelerating growth at a low valuation
For the second quarter, Micron expects its revenue to rise 21% year over year at the midpoint, its adjusted gross margin to expand up to three percentage points, and its adjusted EPS to increase about 67%.
For the full year, analysts expect Micron's revenue and earnings to grow 17% and 45%, respectively. Next year, they expect its revenue and earnings to grow another 26% and 93%, respectively. Those are incredibly high growth rates for a stock that trades at just 19 times forward earnings and less than three times next year's sales.
Mind the long-term challenges
But there are still challenges on the horizon. Micron's loss of trade secrets to a state-backed Chinese chipmaker back in 2018 indicates that China -- which openly accused Micron, Samsung, and SK Hynix of fixing memory prices -- still wants to flood the market with cheap memory chips. That worst-case scenario could still become a reality if the tech war between the U.S. and China escalates.
Micron also remains an underdog in the memory market. It ranks third in the DRAM market after Samsung and SK Hynix, and fourth in the NAND market after Samsung, Kioxia (Toshiba), and Western Digital.
However, SK Hynix will jump from fifth place to second place in the NAND market after it closes its planned buyout of Intel's NAND business over the next five years. That pressure could curb Micron's growth and force it to ramp up its spending to stay competitive.
Micron's strengths outweigh its weaknesses
Micron is a cyclical stock that can burn investors who buy at the peak instead of the trough. However, Micron's stock clearly passed the trough at the end of 2020, and it is likely rising toward another multi-year peak.
The secular tailwinds are strong, however -- especially across the 5G, auto, data center, and gaming markets -- and Micron remains the top "pure play" on DRAM and NAND chips in the market since its top rivals are either diversified across other non-memory businesses or off-limits to U.S. investors.
Investors should recognize the long-term headwinds, but I believe Micron's strengths still comfortably outweigh its potential weaknesses. It's an easy buy at these valuations, and I believe it could rise higher throughout 2021.
